Arbitrage

Consistent with the zeitgeist of this market, last week's headlines speculating on a takeover of Chipotle by Starbucks saw trades embrace the "FOMO" (Fear of Missing Out) in lieu of possible risks such as, oh I don't know, perhaps the whole theory of the M&A between the two firms being a desperate attempt to pacify underwater shareholders, resting on the common theme between the firms of CEO Brian Niccol (current CEO of SBUX and former CEO of CMG). 

Because Starbucks is just under three times the market cap size of Chipotle, the classic arbitrage play on Wall Street is to aggressively buy the smaller firm getting (possibly) acquired, while selling the larger firm. This is nothing new under the sun, of course. As we noted with Members, it is likely correct to buy puts on the smaller firm (CMG) if bearish, rather than shorting common and risking a monstrous gap higher on actual news of a deal. 

However, Starbucks came out earlier today and apparently ruled out the deal, which may or may not be part of the gamesmanship we so often see in mergers and acquisitions. 

Putting to one side the rumors and headlines, you can see Chipotle is actually lower now than where it was last Thursday before the M&A headlines began. This seems like a harsh judgment by the market that it did not appreciate being manipulated on a flimsy M&A rumor. 

Of course, I am still waiting for the broad market to take a similar stand in the face of all of the jawboning from the White House, a spineless Fed who can barely manage one measly 25bps hike, and plenty of suspect accounting in what Jim Chanos has repeatedly called, "The Golden Age of Fraud."